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Eli Lilly (NYSE: LLY  ) is expanding its diagnostics business by picking up privately held Avid Radiopharmaceuticals. External growth is certainly the easiest way to catch diagnostics kings such as Roche and Abbott Labs (NYSE: ABT  ) .

Avid has one diagnostic that it's already submitted to the Food and Drug Administration, florbetapir, which detects plaques in the brains of patients with Alzheimer's disease.

The real winners if florbetapir is approved are the drugmakers that produce Alzheimer's drugs: Pfizer (NYSE: PFE  ) , Eisai, and Forest Labs (NYSE: FRX  ) . If florbetapir allows patients to be diagnosed earlier, they might also start taking Alzheimer's drugs earlier.

Eli Lilly isn't in that group, but it's hoping to be. The company's most advanced drug, semagacestat, crashed and burned in August, but it still has another Alzheimer's drug, solanezumab, in phase 3 development.

Florbetapir could also help drugs in development by limiting the variability in the patient population. Since there isn't a great way to diagnose Alzheimer's, patients who have some other form of dementia inevitably get enrolled in clinical trials.

The diagnostic could also be used to measure disease progression. Both Lilly's solanezumab and rival bapineuzumab, which is being developed by Elan (NYSE: ELN  ) , Johnson & Johnson (NYSE: JNJ  ) , and Pfizer, attack the plaque directly, so florbetapir might be able to help drugmakers figure out if their drugs are breaking up those plaques.

Eli Lilly is potentially paying $800 million for Avid, but only $300 million is on the line initially with the other $500 million tied to regulatory or commercial milestones. Eli Lilly is a minority owner of Avid through its venture capital arm, so investors should have fairly high confidence that it isn't overpaying.

This purchase isn't going to be the move that saves Eli Lilly from its patent cliff crash, but Avid looks like a nice addition that should make the revenue fall a little less deep.

Interested in keeping track of Eli Lilly as it makes its move into diagnostics? Click here to add it to My Watchlist, which will help you keep track of all our Foolish analysis on Eli Lilly.

Pfizer is a Motley Fool Inside Value recommendation. Elan is a Motley Fool Rule Breakers choice. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson, which is a Motley Fool Income Investor recommendation. The Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool has a disclosure policy.

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